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The Shutdown Rule

Conventionally stated the shutdown rule is: “in the short run a firm should continue to operate if price exceeds average variable costs.”

The shutdown rule “R ≥ TC” is old hat to economists and process engineers. Simplistically — if it costs more money to stay open than you’re able to generate while open, you shut it down. Simple right?

Where it isn’t prevalent is in the world of recruitment. Recruitment should be a solution to a business challenge, a business challenge created by not having enough or the right people in the right places — the old Jim Collins “bus” analogy — right people, right seats, etc.

Time and time again I receive the same feedback when talking through our model with a prospect, especially “it doesn’t cost me anything if a contingent search is unsuccessful”. I have lots of answers to this and why it isn’t the case, but I am not looking to write a sell sheet here. Instead, I would rather focus on this question: In what world does having an empty seat not cost you money?

What is it about the collective ethos of business that an empty seat — a chink in the production process — does not factor into a decision like the shutdown rule? At what point do employers look to a position and say, “If we aren’t seeing the return on this seat, if we don’t see enough value in the seat, it won’t equal R ≥ TC, why don’t we just shut it down?” Why is every seat in your organization not subject to the same scrutiny as it would be on a production line?

The next time a requisition begins to age, but the feeling is that you aren’t willing to spend on a project or an agency, the real question is: “is this role R ≥ TC with a project fee or contingent fee factored into that variable cost?”

If the answer is no, then perhaps it should be subject to the shutdown rule?

My suspicion is that when people evaluate a requisition in the greater context of the business, the answer would likely change. Right now the question asked is: “Is the cost of this requisition valuable enough to warrant a fee?” The real question we should all be asking is: “What is the cost to the business every day that the requisition sits open?” Furthermore, where does this opportunity cost fall when speaking in terms of R ≥ TC?

I think changing the question to be one of organizational context rather than recruitment context also changes the answer a little bit. But I’m curious, what does R ≥ TC mean in the context of your organization?

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